The Problem with Low-Income Tax Credits: Billions in Improper Payments

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While praised by Republicans and Democrats alike as an important incentive for the working poor, the federal Earned Income Tax Credit (EITC) and other tax credits for low-income Americans are coming under renewed attack by government watchdogs for excessive overpayments and fraud.

A new report by the Treasury Department’s inspector general for tax administration complained that the Internal Revenue Service continues to pay out billions of dollars annually to taxpayers who erroneously or fraudulently claim they are owed a refund under the EITC and other refundable tax credits for low-income families.

The Office of Management and Budget (OMB) and the Government Accountability Office (GA0) have the EITC on their watch lists because of the tax incentive program’s tendency to trigger “significant improper payments.”

The latest outrage: The IRS issued an estimated $16.8 billion of improper EITC returns to filers in fiscal 2016, or 24 percent of the total refundable tax returns. The year before, the IRS handed out $15.6 billion of improper refunds or 23.8 percent of the total.

But the problem goes well beyond that. Two other refundable tax credits – the Additional Child Tax Credit (ACTC) and the American Opportunity Tax Credit (AOTC) -- have similar problems of billions of dollars in tax returns going to unqualified beneficiaries. Using the IRS’s own compliance data, the inspector general determined that improper ACTA tax refunds totaled $7.2 billion in 2016, or 25.2 percent of total refunds, while improper AOTC payments totaled $1.1 billion or 24.1 percent of the total.

The EITC was passed by Congress in 1976 to create a powerful tool to encourage work and to increase the take-home pay of struggling low and moderate income families and individuals. By 2014, the federal government was providing $56 billion annually in direct payments to families and individuals who qualified for the program.

The amount of EITC is contingent on a recipient’s income, marital status and number of children. Parents with annual incomes of between $39,300 and $53,500 may qualify for the EITC while working poor people with no children and incomes below $14,900 may qualify for lesser benefits, according to the Center on Budget and Policy Priorities

Over time, however, the program administered by the IRS suffered from continuous administrative problems, a controversy over giving billions to illegal immigrants, and more than $130 billion of overpayments.

The IRS has known for many years that nearly a quarter of the EITC payments it issued were going to people who didn’t qualify for the credit under the law. And while in many cases the IRS had the ability to identify false claims before making payment, the agency lacked both the legislative authority to stop the payments or the resources to investigate improper or illegal payments on an individual basis.

The Improper Payments Elimination and Recovery Act of 2010 strengthened the IRS’s reporting requirements in targeting significant improper payments, in hopes of reducing the flow of improper payments.

However, J. Russell George, the Treasury Inspector General for Tax Administration, said that his office’s audits of improper payments over the past few years “show that curbing improper EITC payments is still a challenge for the IRS.” Moreover, he said, “the methodology the IRS uses to conduct risk assessments still does not provide a valid assessment of the risk of improper payments for refundable credits other than the EITC.”

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.